Transcription
The clock is ticking and kind of running out because China is not going to keep depleting its inventories forever. It's going to start replenishing, and people should be keeping their eye on commodities and inflation. Genius is out of the bottle.
Is there a reason for central banks to continue buying gold right now?
Well, yes, it's cheap. I'm pleased to welcome back to the show a regular of the program and friend of the program, Steve Hanky, professor of applied economics at Johns Hopkins University. On the agenda today, rising oil prices, the renunciation of the Iran war. What does that mean for the rest of the economy? How will the Fed respond? Uh, AI stocks are bleeding, uh, across the pond. Of course, in Korea, we have a situation where people are getting margin called, a lot of brokerage accounts. What's happening? Is this the beginning of the end of the AI trade? We'll find out with Professor Hanky. And we'll be going over a viewer question. A viewer submitted a question about gold revaluing it to $20,000. We'll talk about that. Thank you very much for coming back on the show. Professor Hanky, welcome back.
Thank you, David. Good to be with you.
Let's start by addressing the rising oil price. Currently, WTI is $83 a barrel. Now, uh, this comes on the back of a renunciation of the Iran conflict. You'll recall that a couple weeks ago there was a ceasefire that didn't last very long. And since then, uh, there have been renewed attacks on cargo ships going through the Strait of Hormuz. And, uh, there was, for a period of time, uh, transit through the Strait of Hormuz. And I'm going to show my screen here. Uh, here is an article from Reuters illustrating the, um, traffic through the Strait of Hormuz. You'll see that, uh, traffic actually rebounded in June as there was a temporary ceasefire, and that's actually come way back down to, uh, pre-July levels now, probably even lower. Uh, so at what point do we start seeing a return to what we saw in May and April, uh, which is to say higher transportation costs and perhaps higher costs across other sectors that are affected?
Well, this strait is, uh, for all practical purposes, closed. And who, who closed it? Interestingly, Trump closed it with these current wave of attacks. Now, what, what are we in our ninth or tenth day of, uh, attacking Iran? And that, that closed the, the strait. So, the causality is very important. It's Trump who closed it. So, so it is closed. And, uh, related to that is also the fact that the Houthis have shut down the Red Sea. This, the strait that leads into the Red Sea. And, and that's significant because the, uh, Saudis, once the Strait of Hormuz was closed, went to an alternative that they have, a pipeline. They cranked that up. They hadn't been using it, and that pipeline, uh, exit is over on the Red Sea. So now that, that's shut off.
So you've got a couple things going on at the same time. Basically, two straits are shut down, and they're shut down because Trump has re-engaged, uh, in, in the, in the war with Iran. And, and as a result of that, if you look at Brent prices, by the way, uh, from July 7th until the 21st, uh, which is today as we speak, Brent has gone up 20%. And more importantly, the spread between the spot price and the price as of December, that's quoted for December 26, 2026, that spread was 3%. In other words, if the, the spot price was up here, the December 2026 was down here. There was a 3% differential on that. So the market, already on July 7th, was indicating that people were willing to pay a premium to get current delivery on oil, meaning what? That inventories were short. They were, they were running out of inventory. The, the market was in what they call backwardation. For people, people who trade commodities know this jargon. The market was in backwardation for crude. That's a very rare thing. In the last 20 years, the crude market's only been in backwardation 5% of the time. So usually, it's in, in a carry market where the spot price is down here and the futures price is a little bit higher. That's called a carry market. That's typical. And, and that indicates that inventories are adequate. There's no impending shortage. But when that shifts like that and the spot price becomes higher than the futures price, you know you're running into a shortage. And in a way, that's more important to look at the forward curve than to look at the absolute level of the price. So, so the price has gone up 20%. Now, what's happened to the backwardation? It's gone from 3% to 8.2%. So, so the thing has become steeper. The, this, the spot price is becoming more and more elevated relative to the December 2026 futures price, indicating that the shortage is becoming more severe.
So that's, that's what's happening in the crude market. You get more or less the same picture in gasoline and diesel, uh, also the same thing. Uh, actually, there's more backwardation in both the gasoline market, the shortages are much more severe. The, the gap between the spot price and the futures price for December 2026, it's almost 30% for gasoline. It's only 8.2% for crude, and it's 16% for diesel. So, so the shortages in gasoline and diesel are much more severe than the shortages in, in crude. But the shortages in crude have been magnified. They've increased. The severity has become more pronounced since.
So you think this situation today is a little more detrimental or alarming than when the war first broke out in late February?
It, it isn't, it isn't quite as severe as the first round.
Okay.
Remember, remember the first round, the prices were higher, and the, and the backwardation was even greater. But, but it's coming back.
I see.
It's coming back big time. It's, it's not up at those peak levels, but it's coming back. And I think I mentioned on the show before, the last time we talked, that I thought we'd run into shortages by the end of the summer and early fall, uh, as the inventories just completely dried up. And it looks like that's happening. I mean, we've been going over a week on these Trump attacks, and, uh, that just drags the whole thing out. A week longer of nothing coming out of not only the Strait of Hormuz. If this, that chart that you had, by the way, contains the vessels that are carrying cargos, and also tankers, and the tankers have really gone down to zero.
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Yeah, here it is one more time. Flow through traffic in the Strait of Hormuz. Let's revisit, uh, some of these talking points in this article. This article sums up quite well some of the commonly held beliefs as to why oil hasn't gone even higher in the last couple months. Let's go through them, professor. Number one, Chinese imports for oil fell. The biggest surprise was China, the world's largest oil importer, which has slashed crude imports to the lowest in nearly a decade by June. Fuel exports were also curbed. Its population started using electric taxis instead of personal cars, and its petrochemical sector also reduced volumes. That's number one. Number two, the US pumps more oil. Uh, the Strategic Petroleum Reserve falls to the lowest level since 1983. Uh, number three, uh, US President Donald Trump repeatedly wrong-footed oil market bulls by making statements about peace agreements and the resumption of flows through the Strait of Hormuz. I'm not sure how that has a long-term impact, but anyway, that's in the article. Number four, uh, which we talked about, the Strait of Hormuz temporarily rebounding in traffic. And number five, ample supply of prompt physical cargos. Traders say there's ample supply of physical oil limiting the price reaction to the latest escalation in the conflict. This article was dated yesterday. How many of these.
Yeah. Where, yeah. Where was that published?
Reuters.
This was Reuters. This was dated July 20th, yesterday.
Yeah. Well, I, I think, I think the reporter did a pretty good job, actually. I.
I don't, I, I think all of that is correct. Uh, do you want to go through these one by one?
Well, I'd like to get your take on which of these do you think is going to be short-lived and which is sustainable. Uh, let's start starting with number one, which I think is the most important one, uh, that people are talking about, the Chinese situation, when they've been importing less oil and relying on, I guess, their reserves. I mean, how people have been speculating as to how sustainable this may be.
Well, well, it, it has its limits because they're drawing down huge inventories that they had, the Chinese. So, you, you have to look at there are two flows that come into the market, and one flow comes out of inventory, and the other flow comes out of wells that are pumping oil right now and putting it on, uh, tankers, and the tankers are, you know, going out all over the place. So.
Yes.
So, so what, what you have with the Chinese, they, they drew down their inventories and now, uh, they're, they're buying again. Uh, just this morning, they, they, a Chinese tanker was turned around on the Red Sea. The Houthis didn't let them in to pick up oil from being produced by Aramco, the Saudi oil producer. So, so the, the Chinese are buying again. They, they want to buy again.
Yeah.
And, and, and so that means that the flow coming out of their inventories, they, they'd like to replace that flow and replenish their stocks and, and, and also, uh, import oil that's freshly pumped, not in inventory, freshly pumped. They, they want to get some of that to replenish those inventories that are down and, and also run the, you know, the teapot refineries in China. So, so that's that slide. Go to the next one.
Yes. Uh, number two, the US pumps more oil. The United States, the world's largest oil producer, pumped more crude with production reaching a record 13.93 million barrels. Uh, separately, the SPR, the Strategic Petroleum Reserve, has been, um, depleting as well, falling to the lowest level since the 80s.
Okay, so you've got two flows there. One, the pumping from wells is up. They can't go too much further with that, so that we can eliminate that. And the flow coming out of the Strategic Petroleum Reserve, we can't go much further than that because, because we're reaching the bottom of the barrel, so to speak.
Yeah. So, so those again, that cushion is, is kind of disappearing. Go ahead.
Yeah. Uh, and just to add to that, I've been talking to some people about the physical limitations of pumping even lower than the current levels in the SPR because if you go even much lower, the pressure in the oils will be so low that it becomes difficult to extract more oil. Uh, number three.
Yeah. Oh, yeah. You, you don't really go down literally to the bottom of the barrel. You go down to.
To where, where you have the proper margin of safety and all that.
Number three, President Donald Trump has been repeatedly wrong-footing the oil market bulls by making statements about peace agreements and the resumption of flows through the Strait of Hormuz. Just separately, just completely off-topic, have you seen the news, professor, of Trump announcing the possibility of charging, uh, people $100,000 for early posts on Truth Social? Like for $100,000 a month, you can get, uh, his posts first.
Oh, yeah. Yeah. This is, this is part of the whole market manipulation thing that Trump is in. He's, what's he, what's we term in economics, there's a whole theory called big players. Uh, and, and the big players theory is that if you get somebody who qualifies as a big player, they're people who don't pay any attention to supply and demand. Uh, they, they, they aren't profit-motivated per se, and, and they have a lot of influence. Now, Trump, Trump, it turns out qualifies. And, and what happens once you get a big player involved, people become less and less interested in looking at fundamentals, as supply and demand.
Because they, they know there's a big player in there manipulating the thing.
And, and so Trump definitely has one reason, by the way, that that oil market is not further, further in backwardation or hasn't been, that means the spot price being above the futures price, is because of Trump's interventions. But that, that wears thin. People don't believe him. So, so the, the effect of, of the big player is being diminished, I think, and devalued because he, he keeps switching his tune so frequently.
Yeah. But, but at any rate, and, and the Truth Social thing, I mean, you know, the guy's selling everything. I mean, watches, shoes, hats, you know.
Okay.
As they say, you know, for the President of the United States to put it, my, I'll be polite and just say it, it's in bad taste.
Here we have a.
You just, you just don't, you just don't do this kind of stuff.
Yeah. [snorts] It hasn't been confirmed yet. He's, he's, he, he posted that he may consider doing this. So I don't know how that's actually legal, but whatever. Um, I'm not a regulator.
You.
I don't know.
You're, you're, you're worried about the law if you're Trump. I mean.
I, I. Well, I look, I don't know how it's legal for an investor, but anyway. Well, well, that's a, that's a.
Side. By the way, the latest thing as of yesterday, he's, he's going to, he's going to, he's going to knock Canada. He's going to knock you with 50% tariffs.
Now, yes.
That, that's, we'll see if that's legal.
Yeah. Uh, he, he, that, that was on my agenda as well. Um, more tariffs. A lot of countries threatened with tariffs, um, earlier, earlier yesterday. Uh, he also, Trump also said that, uh, the wildfires in Canada have been polluting the air in the US, which is true, and then he plans to raise tariffs.
Because of that.
Yeah.
If Canada doesn't get its act in place. Yes.
Well, yeah. The wildfires in Canada, you, among other things, there's basically nothing Canada about it because these areas are so remote. I mean, there, there are no roads in there or anything else. But, but at any rate, be that as it may, the, the main thing, the main takeaway from this, besides the our, you know, the chuckle we got out of it, is that Trump is making so many enemies for the United States, and the international perception of the United States has turned very negative. The international perception of China has actually increased and gone positive, and the US has gone negative.
Yeah.
And, and, and that geopolitically, that's important because we have more and more countries.
Pivoting towards China. So, China, the, the more enemies, the more enemies that Trump makes, he, he's got everybody in Canada so pissed off that, you know, it, if he, he'd need a huge security detail to go to Canada, by the way.
Yeah. All right. Uh, let's take a look at the Fed.
And, and, and it's very interesting who, who has become all of a sudden popular. Who, who was, who was a, you know, basically an international bureaucrat was Carney. He's the prime minister now. This just makes Carney look good.
Do you think China ironically helped the US by lowering their oil imports? In other words, keeping the international price.
You mean whether there was whether there was a deal between Xi and Trump?
I, I don't know. I, I was just.
Well, I don't know either. That's what I was going to say. I, I don't know. I, I do know the fact. The fact is this did help.
Uh.
Yeah.
This did help the United States and, and Israel.
But, but it looks like that, it looks like that clock is ticking and kind of running out because China is not going to keep depleting its inventories forever. It's going to start replenishing them and importing oil, which they're doing, by the way.
They, they, they are importing now.
How is the Fed going to respond? Take a look at the Fed watch tool and how it's progressed and changed since the last couple of days to weeks. Uh, still, uh, a higher chance than, um, than 78% of no change by the July 29th FOMC meeting, which is next week. Uh, by September, we have now a reversal, so only 31% chance of no hike, uh, 50, more than 55% chance, 60% chance of a hike. Um, and then by basically by December, we have only a 13% chance of no hike, possibly more than two hikes, two 25 basis point hikes now. Um, how would the Fed justify raising rates twice this year if that were the case?
Oh, well. Number one, they, they focus, they're obsessed with the Fed funds rate and interest rate. They, they think that is sets the tone for monetary policy. And, and interest rates don't set the tone for monetary policy. Changes in the money supply chain are the thing they should be looking at. But never mind, they're not monetarists. They don't look at the quantity theory of money. They don't look at the money supply like I do. But they look at the Fed funds. And as I say, the, the money [clears throat] supply has been accelerating any way you want to cut it. In particular, you look at Devisia M4 measures that are put out by the Center for Financial Stability, where I'm associated in New York, and the growth rate is now 6.7% year-over-year for Devisia M4. That's, that's well above Hanky's golden growth rate of around 6%, a rate consistent with a 2% inflation target. So that means what? That means inflation genie is out of the bottle. It will continue. And if it continues, I, I think this switching that you've just put up on the board is reasonable. I mean, I, I think the, I think the markets are pricing in what probably will happen. I mean, inflation will stay up because that's already been baked in the cake due to past accelerations in the money supply. So, so that's going to still be around.
And, and we've got, uh, Chairman Walsh has taken over, and, and you saw the July 10th report by the Federal Reserve, and for the first time on pages 32 and 33, they actually mention the money supply. The first time they've ever mentioned it for years. So, so in, in a way, this, let me claim victory. I, I've been preaching what, ever since we started doing our interviews.
Yeah.
They got to look at the money supply. They got to look at the money supply. Paul rejects looking at the money supply. Paul rejects looking at. Now, Walsh comes in, and in their newest report, they mention money. Not much, but they mention it. So, so the window is open, and, uh.
Mhm.
We, we, we, we, we don't exactly know what this means because there, there are all kinds of schools of monetarism. I happen to be a broad money guy, and, and I like these very broad measures like M4 that the Center for Financial Stability comes up with. That's, that's better than M2. You know, they, they dropped M3 in 2006 at the Fed, and the broadest measure they have now is only M2. So maybe they'll change that. If, if they start looking at money, the first thing you want to debate is, okay, how do you measure it? What's the best measure? And, and the broader the better.
Okay, I'd like to take a look at this question that was submitted to us. So, this has to do with the rumor that the US would revalue its gold. I'll just read this email. Hi, David. Longtime listener of your videos. Want to thank you for your interesting work. This is from Leo Kreshmer of Austria. Thank you, Leo, for your submission. I'm sure you heard about the rumors of the US revaluing its gold to $20,000 US, similar to what Roosevelt did in the past. Some say that move, causing all kinds of positive side effects, could reduce the deficit to a manageable 70%. Allow me to submit a request that you ask Professor Hanky about this when you have him on next time. He is by far my favorite on your show. Well, um, you're a favorite guest of a lot of people. Professor, what do you say to the $20,000 gold revaluing theory? And will that solve. Well, first of all, what does that mean? And second part of the question, how will that solve our deficit?
Yes.
Yeah. Let's, let's first take the $20,000 revaluation. That, that doesn't mean anything because that's just a bookkeeping entry. You, you can revalue something on the books any way you want. They, they could value it at a hundred thousand or whatever they wanted to do and put it on the books. The, the key is the mark-to-market value. How, how much is this stuff actually worth if you were going to sell it? Uh, the current price of gold, you know, it's just a tad over $4,000 an ounce. Let's just call it 4,000. So, and, and if they actually sold that, if the US said they're, they're, they're going to sell their 261.5 million troy ounces of gold, uh, the market would tank with it. It would go down below 4,000 for sure. So, forget the $20,000 thing. Just, just get that number out of there. Let, let's talk about how this would work. Right now, the Treasury owns the gold. The US Treasury owns, owns all of the 261.5 million troy ounces of that's owned by the United States. The Fed owns gold certificates. So if, if gold is sold, the, the Fed, how much are those certificates worth? They're, they're worth, as of a 1973 statute, $42.22. So, so the Fed would keep that, and the remainder, if you subtract $42.22 from around 4,000, the remainder would go to the Treasury, and the Treasury would put that money in the Treasury General Account at the Fed, and that's, that's basically the US government's checkbook, the TGA account. So, so that's, that's actually what would happen. But, but if gold, if you sold it, and all of it, and you sold it at $4,000 an ounce, it's only worth a little over a trillion dollars. And what is our US debt? Our US debt is $39.6 trillion.
So.
Yes. So the, the whole, this whole debate about revaluing gold and everything is, it's, it's just nonsense, basically.
How did this, where did this come from? This, this idea, and where did the $20,000 number come from?
Gold bugs go off on this all the time. They get themselves all excited about it. And, and, and by the way, the, the $20,000 an ounce, you'd, 10, the, the $20,000 an ounce, you'd, you'd probably even for a bookkeeping entry, you'd have to revalue the thing at what, about 40,000?
Yeah.
About 40,000 would, would be at the more or less the same as the federal debt level in the United States. But, but it's a bookkeeping entry that's irrelevant. It, it doesn't, it's just on the books.
Right, because the market price of gold, let's say 4,000, is $4,000. So even if you revalue it on the books to 40,000 or 20,000, whatever number you want, no one's going to buy it at $20,000 an ounce.
So how does that. So.
What does that matter? So the, the economic reality is, if, if you're going to sell it.
The market price is the valuation. Forget it. Forget all the revaluation numbers and everything. The market price is the price. And, and out of that price that's received, the Fed, by statute, would get $42.22 an ounce, and the rest would be left for the Treasury. And they would put it in the Treasury General Account, which is held at the Fed, which, which is, think of, think of that as it's the checking account of the Treasury of the US government.
Is a theory that if you revalue your assets to a much higher number, it doesn't have to be gold. It could be anything the Federal Reserve or the government owns. They could, I guess, in theory, make that collateral and loan more. Is that.
Well, not, not really. If you, if you had an, if you had an audit, do, do you think an auditor would let you get by with putting gold on a balance sheet at $20,000 an ounce?
Yeah, because in theory, you could just revalue anything you own.
Well, maybe they would because now it's on the balance sheet at $422 an ounce.
Yeah. Okay.
But we're talking about the government. You know, this is, this is government hocus pocus.
Okay. Okay. Okay. So, let's set this theory aside. Unfortunately, we're not going to get a revaluation anytime soon, as per the professor's view. All right. Uh, moving on. I'd like to talk about now, uh, this article that you wrote, Japan's Monetary Conundrum: Why the Yen Hit a 40-Year Low as Interest Rates Hit a 31-Year High. This is in Fortune.
Um. Yeah, I, I co-authored that with John Greenwood, by the way.
Yes, you and your co-author John Greenwood wrote this. Uh, tell us about this article. Yeah, it is interesting how this is happening in Japan, and ultimately, uh, does this affect US Treasury demand by, in any, in any sense?
Uh, yeah, let's get to that. First of all, everybody just has Japan completely wrong. They, they, because Japan has low interest rates, people conclude they have loose monetary policy. And this gets back to the fact that monetary policy is not about interest rates. It's about changes in the money supply. And the money supply for decades in Japan has been growing at a very, very anemic rate, hardly growing at all. As a result of that, the economy hardly grows at all. They don't have inflation, and inflation yields on bonds follow inflation. So it all makes sense. You have very low, very tight, not loose, very tight monetary policy. You have very slow growth in nominal GDP, which contains a real and an inflation component. You have low inflation, and you have low bond yields. So that's, that's the story. Everybody has it screwed up because they, they think like the Fed and everybody else, and that is that the, the tenor of monetary policy is indicated by the level of interest rates. No, the, the tenor of monetary policy is always dictated by changes in the money supply. And if it isn't growing, you won't have much inflation. You won't have much real growth either. So if you add real growth and inflation together, nominal GDP won't be growing very fast. And, and unlike everybody's conclusion, we just had one, one of the experts at the Financial Times just wrote something today on central banking, Chris Giles. He has it all wrong, by the way. The whole thing is wrong. And that, that is that inflation's coming back. Inflation's coming back in Japan. Interest rates are going up. Well, that's what the Bank of Japan says, too. But it's all wrong.
Because in inflation's going to come down because the money supply isn't growing. And inflation comes down, interest rates will come down.
That's, that's what's going to happen. Inflation isn't going to go up. It's going to come down. And if inflation goes up, bond yields will come down. They won't go up. So everybody's just got it all wrong. Is that, that's basically what Greenwood and I said in the article. And incidentally, Greenwood is a super expert on the Bank of Japan because the first job he had as a professional job was at the Bank of Japan. He, he knows that, he knows that place inside and out.
If the Japanese interest rate comes down, would that mean that demand for US treasuries and US assets go up?
Well, that, that means that the carry trade goes up. Borrow, borrow cheap and.
Japanese yen and, and, and export that capital into other markets, whether it be the United States or other places. So, so there is a, there is a US market aspect to this. The, the people who think interest rates are going up in Japan and will keep continue going up, which is wrong, they, they think the carry trade won't be as attractive because it'll cost you more to be borrowing in yen and then displacing that money from Japan into the US market. So, they say, "Oh, this could be a big problem for the US market." I, I think they're, this is, they should not be concerned about this because interest rates are going to turn around and go down, and the carry trade will will stay as it's been a huge carry trade where they're exporting a lot of capital out of Japan into other markets.
Okay. [snorts]
It, it's a simple, it's a simple arbitrage. If, if you're getting almost no interest or yield in Japan, and you're Japanese, you want to, you want to, you want to borrow in Japanese yen and take those funds and put them where they're going to have a higher yield.
So, do you think the yen will continue to depreciate against the dollar?
Yes.
All right. Well, that, um, what's your view on the dollar overall then? Uh, are we going to get continued strength despite, uh, the threat of rising deficits and debt levels?
It, it appears that the strength will continue.
Okay.
At least in the short run. That's the, the dollar is very, very strong. And, uh.
Well, uh, finishing off on, uh, on gold. Now, we had previously discussed a possibility of $6,000, which was your target, which came very close to fruition. By the way, gold peaked at $5,500. So, um, you know, in all intents and purposes, you were almost right there. It's now at 4,000. Like we talked about, several large banks have reduced their forecast. Bank of America is now lowering their forecast to $4,300 by, 4,300 by the end of the year. Uh, what, uh, does the rising, the possibility of rising interest rates, does that make you more bearish on gold?
Oh, yeah, it, it's going to take longer to hit the target. That's of $6,000. But we, we, we will hit it. The headwinds are the, as you say, you, that chart that you had up there about the Fed funds rate, that, that's a, that's a key thing because if, if interest rates go up, the opportunity cost of holding gold, that, that goes up. That's a headwind. And if the dollar's strong, that's, that's another headwind.
Yeah.
Those, those, those are the two huge headwinds. But, you know, you, you, if you look at, uh, the, the base case and what's underlying the demand for gold are the central banks. And China is buying big time again.
Mhm.
And, and, and buying, by the way, much more than than the transparent numbers that you're seeing for the central bank buying, central bank of China. They're, they're, they're buying much more. Goldman just came out with an analysis of this, and the buying in China is much more significant than the than the official numbers appear to be.
Yes.
The official numbers, by the way, appear to be that they're buying a lot. But it turns out, at least with the Goldman analysis, which I think is probably accurate, uh, or pretty accurate, uh, in any case, indicate that it's, it's orders of magnitude greater than the official numbers what they're actually buying.
Is there a reason for central banks to continue buying gold right now?
Well, it, yes, it's cheap. Number one, you buy loans so high, David. So that's that's one, that's one thing. But in, in more simple terms, they, they, these are bureaucracies that run by committees, and, and the, and the committees have decided that the target for gold holdings is higher, is higher than the current level that they have of gold holdings. So they're buying.
That's how it works. They set a target. They, they look at their portfolio, they evaluate it, and they say, you know, in the next, in the next two or three years, we want to be holding this much gold as a percent of our total portfolio. And right now, that level is lower. So that means they're always in the market buying.
If gold stays around $4,000 for the next couple of months, can we safely assume that's a bottom?
Well, yeah, David, I'll be a wise guy and say, "Yeah, it, it would be the bottom for the next two months." [laughter]
Fair enough. Okay. Uh, Professor Hanky, any other assets you're watching that appear to be on the move, either, um, in either direction?
I, I, in general, uh, I think people should be keeping their eye on commodities and, and, and, and become more and more concerned with what I call AI fatigue. It looks like we're getting a lot of AI fatigue popping up.
South Korea and, and, and other places. So, and we'll get, by the way, well, next week, I, we're going to have some earnings reports from some of these AI operations, and that'll be very interesting to see how the market reacts. First, to see what the earnings are.
Yeah.
To, to see if they exist, and see how the market reacts. So, next week will be big.
I want to pull up the CNBC article about, uh, South Korean traders, um, and their leveraged positions getting margin called. So SKH Highex, one of the leading chip manufacturers in the world, has been selling off, down roughly 30% from a couple weeks ago. South Korean online trading forums were full of lament, especially after SKHEX's recorded one-day plunge last week. I'm sorry, not 30%. As of now, that is, uh, the SKH High single stock leverage ETF, a product designed to deliver twice the daily move, has fallen about 70% from its record highs. Yes, 30% for the stock, 70% in leveraged ETFs. Um, reached and down roughly, uh, 50% from its debut. I want to go back to before I started investing in stocks. Give me my money back, one investor wrote on an online forum. You're determined to kill me, another said. The losses underscore how South Korea's retail investing culture has amplified swings in the country's technology-heavyweights. About 1.2 million brokerage accounts were leveraged, and, um, margin called last week, and that represents 10% roughly. [snorts] 10% of the country's total number of trading accounts. By the way, [snorts] um, have we seen this story before somewhere?
Yeah, it, it's called a speculative mania. That's what's going on with AI. You know, why, why would a, you know, I suppose these people writing the comments are retail investors. Why, why in the world would a retail investor be investing in a leveraged product? You know, you have to be insane. I mean, there's obviously tremendous risk involved in that kind of product. So, it's one thing for a professional to be doing this and watching it every second and knowing what they're doing. That, that's one, that's one thing. But for, for, you know, Joe Blow to be investing in leveraged products, you know, you've got to scratch your head. You know, who.
I guess if your, if your.
If your account size isn't as big as an institutional investor's, your risk tolerance goes up.
Well, also the leverage, also if you, if you're very young.
You know, if you're very young, you can afford to get wiped out because you, okay, you get wiped out, and you keep your job and gradually rebuild. I'm not recommending that, by the way.
Yeah.
Yeah. Yeah. But for, for an older person, it is really insane.
I mean, you, you could, you could see your life savings wiped out overnight, and then, and then what are you going to do if you're retired and you're not even working?
You're going to be forced to take a part-time job so you can buy groceries?
When you say AI fatigue, let's bring it back to your statement about AI fatigue. What does that mean? Practically speaking, maybe this is a sign or a symptom.
I, I, that, that may, there are some telltale signs that, that jumping on the bandwagon. There aren't quite as many jumping on the bandwagon as there were six months ago, let's put it.
Yes. Okay. So, so, so the, the everyone who's on the bandwagon may, maybe they aren't falling off or leaving so great so much, but the, the, the jumping on has kind of stopped.
Okay. Finally, professor, my closing question for you. So given the topics we discussed today, should Americans be concerned about inflation reappearing again and much tighter monetary conditions because of higher inflation from the tariffs and from, I'm talking about potentially new tariffs, and from higher oil prices that we've seen in the last couple of weeks. Recall that the latest inflation print, the CPI, was 3.8%, 8%, much lower than the previous month and much lower even than the consensus expectation. So inflation has been on a trend downwards in the last two months or so. Can you expect, can we expect this to reverse starting next month?
I, I think we can anticipate, number one, the, the 4.2% when it jumped up, that, that was a big jump.
Yes. Way, way, way above what the consensus expected. And, and it didn't go to 3.8, it went to 3.5. So.
Oh, yes, my apologies. Yes, 3.5. Yes, you're right.
3.5. So it went down much further. The consensus was that it would go down to about 3.7. I think it's going to be highly volatile and stay, stay elevated. And, and that's because not of oil, not not because of tariffs. Those, those affect relative price changes of different commodities. Like, if you put a tariff on timber coming in from Canada, what, what's it going to do? Well, the price of timber and lumber in the United States goes up relative to everything else. Oil. You strut the, put the clobber the Strait of Hormuz and the strait going into the Red Sea, and oil prices are going to go up relative to everything else. So the relative prices move around, but the overall level is determined by what's baked in the cake with the movement in the money supply 12 months ago or maybe even a little longer than that. So that, if you look at, if you look at what causes the general price level to be where it is, it's the money supply. And the money supply, uh, is, is basically baked in the cake. It's, it's already happened. Remember the sequence, changes in the money supply with a big lag affect and determine the inflation rate. So, so the inflation rates we're seeing going forward have, have basically already been determined a long time ago by what was going on with the money supply. And that, that means to me, reading, reading those tea leaves about the money supply, that we'll remain in this elevated zone of of high inflation, not well above the inflation target of 2%.
Mhm.
So that's, that's what you can expect. Inflation well above the inflation target of 2% with tremendous pressure on the Fed to tighten monetary policy. Now, in their book, the way you do this is by changing the Fed funds rate. That's the instrument they, they look at and are obsessed with. And so, so is everybody else, by the way. It's, it's a wrong thing to be looking at. We went over this with regard to Japan and in some detail. Everyone says, everyone, by the way, says that monetary policy has been loose in Japan for a long time because interest rates are low. No, interest rates are low in Japan because monetary policy is very tight, and the growth in the money supply is very slow, and inflation is very low, and yields follow inflation. So, so they, they don't understand even the basics of the whole thing. And, and by the way, this is, this is one reason why you ask, do I think the yen is going to continue to make new lows? And the answer is yes, because they're so confused about what they're doing at the Bank of Japan and in Japan in general. Because the new prime minister, she's priming the pump. She, she wants to increase the fiscal deficit. They, they have the world's record level of debt as a percent of GDP, and she wants to increase that by running even bigger deficits.
Yeah.
So, so they, they, they just have a playbook that's, that's all wrong, basically.
I'd love to talk to you more about the Canadian economy in more detail another time. Lots to discuss. The housing markets are correcting.
Uh, the first Chinese EVs that were part of Carney's deal with China just arrived.
So, let's see if this is the beginning of a more long-term relationship. I don't know.
Well, I, I'm certain it is. As soon as the smoke clears up there, let's talk about Canada.
Yes. Yes, that's right.
By the way, you're not, you're not getting any smoke in Vancouver, are you?
No, the, the smoke usually comes from the, uh, interior of, uh, British Columbia, and, and it.
It actually bypasses Vancouver because Vancouver is a coastal city, and then it goes straight down to the US into, into the Midwest.
So, yeah, I feel bad for the Americans who have to put up with this, but it's been an annual occurrence. I was in Colorado last year for business, and, um, even around Denver, people were complaining about the smoke. So it goes all the way down. Yeah. So, so that's part of the thing, but that right now, the big concentrations are in northern Ontario.
Oh, that too. Yeah. Yeah. So, um, it happens all around the, um, less populated areas, and then it goes, and then it goes straight south.
Oh, the, these, these wildfires, you know, there are no roads even going. It's, it's very hard to deal with them because we're talking about native areas. I mean, there are no roads. How are you going to get in?
Back country of BC. Well, yeah, you'd have to, you'd have to drop water from, uh, from seaplanes, um, firefighter planes, um, water and other, uh, firefighting, uh, materials. But, um, that, that's, that's what they've been doing. Uh, but it's just, it's such a large area, you can't contain all of it, and it spreads very, very fast. I don't know if you've seen videos of these wildfires, but the wind pushes them, uh, pushes the fire, uh, very quickly. So, uh, it's difficult to contain.
Yeah. Well, there, all the forests, they're, they're, they're not managed. So, so you've got a lot of blowdown, dead trees, underbrush, and everything. You, it's very combustible. Once it gets going, they, they can really go.
Big time. Firefighters dig trenches, uh, to kind of stop this, the spire, the fire at a, at a, um, you know, at a trench. Um, but you'd have to build miles and miles and miles, and it takes a while.
Yeah, exactly. Plus, to do that, you've got to get into the area, and if there's no road to get in.
Yeah.
You've got a big problem.
So.
Uh, well, more to discuss next time. I'm curious to get your take on, uh, whether or not these tariffs that we're talking about can be put in place. Let's follow up on that story. Let's see if they actually go through and, uh, what happens next. Thank you so much, Professor Hank.
By the way, by the way, what's, what's the, I'm curious. What's the polling of Trump in Canada? Does, is there even one Canadian who would give him a positive sign?
Trump in Canada? I'm not, I'm not sure. I've never looked into that number. Uh, let me just look this up. Gallup news. Donald Trump's approval and favorability ratings in Canada are currently very low, with only 13 to 18% of Canadians expressing a favorable view of him in recent national polls. Overall disapproval of US leadership has reached roughly 79%. Uh, I suppose more people in, in Alberta might like him. Alberta is a more conservative province.
Um.
Well, but I don't, I haven't seen.
The secessionists would probably go for Trump.
Yeah. Yeah. Uh, I, I, I can see that. And, um, I, I don't know anybody in Canada who, who, who has liked Trump. I mean, the Canadians have taken it upon themselves, based on my observation growing up here, to make it part of our culture to dislike whatever the Americans are doing anyway. So, um, I don't think it's a, I don't think it's a.
Yeah. There, yeah. There is a little bit of that.
Sub issue. Yeah. Yeah. I've noticed, by the way, that, you know, you know, Canadians have been, Canadians have been promoting the "Buy Canada" thing in grocery stores as well, only buy Canadian produce and products. And, um, they've been really hammering down on being anti-Trump ever since he imposed the tariffs. Fair enough. But the hate seems to be one-sided. When I go to the US, no one's saying, "Buy only American, don't buy Canadian things."
Oh, yeah. That's true. Yeah. I, I, I don't, I don't think the Americans have any trouble with the Canadians at all.
No. Um.
But, but, you know, this is what happens if you wage war on somebody, which the tariffs are a weapon of war. If you wage war on somebody.
Look at this.
They, they circle the wagons and become nationalistic.
Look at this article from the Toronto Star. I just Googled this. Dated July 15th. More Canadians trust China under Xi than Donald Trump in a new poll. Okay, how about that?
Yeah. That, well, that's international, by the way. That, I, I mentioned this earlier in our conversation today. This is Trump is making enemies all over the world, and, uh, you know, why? I mean.
Why, why make an enemy? I, you know.
Yes.
I.
It doesn't make any sense for me. I, I don't, David, I don't want any enemies.
I, I only want friends. [laughter]
Okay. Well, if you're a friend of Professor Hanky, please write to him like our, uh, viewer Leo from Austria did. Thank you, Leo, for your submission. Please write to Professor Hanky. I'll put his email in the link down below in the description so, uh, we can take some of your questions for the next interview. And, uh, I'll also put Professor Hanky's X account so you can follow Professor Hanky on X. How many followers do you have now, Professor Hanky?
Uh, 851,000.
Yeah, let's, let's get the professor up to a million.
Not, not 851. 851,000.
Yeah, that's right. No, I, I understood that. Let's get, let's get the professor up to a million soon. Thank you so much. We'll speak next time, professor. Take care for now.
Okay. Thank you, David. Have a good day.
You, you as well. Thank you for watching. Please do subscribe and like.